How does an umbrella company work?

Working through an umbrella company is the easiest way to operate as a contractor and once you have signed up, you will have a minimal amount of ongoing administration. However, do you know how an umbrella company actually works? Read our article to find out more about the processes involved when you sign up with an umbrella company.

Registering with an umbrella company is easy

To successfully sign up with an umbrella company, you need to complete a registration form that will consist of questions about you and your working circumstances (name, address, date of birth, assignment details, recruitment agency, etc.). You will also be required to provide the umbrella company with proof of identity and address.

Once you have completed the form and it has been received and approved by the umbrella company, you can relax and wait for your employment contract.

You will be employed by the umbrella company and not your client

When you receive your contract from the umbrella company, make sure you read it thoroughly and are happy with all the details before you sign and return it. The contract will state that you acknowledge that you will be paid your salary by the umbrella company (your employer via an overarching employment contract), who will be responsible for paying you and making the appropriate deductions.

Meanwhile, your umbrella company will sign a contract with your recruitment agency, confirming that the recruitment agency will transfer your salary to the umbrella company.

To summarise the chain of payments, your client will pay your recruitment agency, your recruitment agency will pay your umbrella company, and your umbrella company will pay you via PAYE.

Your tax and National Insurance Contributions (NICs) will be paid on your behalf

You will receive PAYE by the umbrella company who will make your tax and National Insurance Contributions (NICs) on your behalf. They will also deduct their margin from your payments and you will receive a payslip with the deductions listed.

You will be paid the same as if you were a permanent employee.

Your administrative responsibilities are minimal

In order to get paid the correct amount and on schedule, you will need to ensure you carry out the following tasks. Don’t worry, your administrative requirements should not take longer than 10-15 minutes each week.

Fill out your timesheets with the correct information.

Upload your timesheets to the umbrella company’s online portal. Make sure it has been signed by the appropriate member of staff.

Send a signed copy of your timesheets to your recruitment agency.

If you are able to claim allowable expenses, upload the receipts to the umbrella company’s online portal.

You can still claim expenses through an umbrella, although it is unlikely you are eligible

In April 2016, the government introduced new legislation that meant a significant number of contractors working through umbrella companies were no longer able to claim tax relief on travel and subsistence expenses. This was done because HMRC believed that a significant number of contractors were carrying out their day to day tasks in the same manner as permanent employees. However, permanent employees are not eligible for the same tax relief as the self-employed and therefore this was considered unfair.

If contractors are deemed to be under Supervision, Direction or Control (SDC) in their place of work, they are not entitled to claim travel and subsistence expenses. HMRC expect a large majority of contractors to be under SDC. There is some good news for contractors regarding expenses – you are able to claim travel and subsistence expenses if you are a genuine mobile worker and are required to travel to irregular temporary locations in order to complete your work.

Your take home pay will not be as high as if you were operating your own limited company

Contractors who work through a limited company are able to pay themselves with a combination of salary and dividends. This is the most tax efficient way to get paid when self-employed. If you are outside IR35, take home pay will be even higher.

When you are working through an umbrella company, you will be paid as if you are in permanent employment, regardless of your IR35 status (IR35 is therefore irrelevant when working through an umbrella company). You will pay tax and NICs as if you were a permanent employee, as well as the weekly/monthly fees of the umbrella company.

Speak to the experts before you decide which payroll option to use

The two most popular methods of operating as a contractor is through a personal service companyor an umbrella company. At Churchill Knight & Associates Ltd, we can help you with both payroll options and our experts are on hand to offer guidance and support. We understand that every contractor is different. This way you can be assured the payroll option you choose is the right one.